Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 20451

IMPLEMENTATION COMPLETION REPORT

REPUBLIC OF MALAWI

RAILWAYS RESTRUCTURING PROJECT

(Credit 2696-MW)

June 28, 2000

Transport 1Eastern and Southern Africa Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir duties. Its contents may not otherwise be disclosed without World Bank authorization

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CURRENCY EQUIVALENTS

(Exchange Rate Effective February 2000)

Currency Unit = Malawi Kwacha (MK)

US$1.0 = MK 46.79

FISCAL YEAR OF BORROWER

April 1 to March 31

WEIGHT AND MEASURES

1 foot (ft) = 0.305 meters (m)1 mile (mi) = 1.609 kilometers (km)

1 square mile (mi2) = 2.590 square kilometers (kn2)1 ton (t) = 0.907 metric tons (m ton)

ABBREVIATIONS AND ACRONYMS

CFM = Portos e Caminhos de Ferro de Mo,ambiqueDCA = Development Credit AgreementGOM = Government of MalawiIDA = International Development AssociationICR Implementation Completion ReportLS Lake Services DepartmentMK = Malawi KwachaMLS Malawi Lake Services LimitedMOU = Memorandum of UnderstandingMOTPW Ministry of Transport and Public WorksMR = Malawi RailwaysMR94 = Malawi Railways (1994) LimitedMRL = Malawi Railways LimitedPA = Performance AgreementPIC = Project Implementation CommitteePSOs = Public Service ObligationsRRP = Railways Restructuring ProjectSAR = Staff Appraisal ReportTORs = Terms of ReferenceUJNCTAD = United Nations Conference on Trade and DevelopmentUSAID = United States Agency for Interantional Development

Vice President: Mr. Callisto E. MadavoCountry Director: Ms. Barbara KafkaTechnical Manager: Mr. Yusupha B. CrookesTask Leader: Mr. Yash Pal Kedia

FOR OFFICL USE ONLY

IMPLEMENTATION COMPLETION REPORTREPUBLIC OF MALAWI

RAILWAYS RESTRUCTURING PROJECT(CREDIT 2696-MW)

TABLE OF CONTENTSPage No.

1. Project Data ......................................................... 12. Principal Performance Ratings ........................................................ 13. Assessment of Development Objective and Design, and of Quality at Entry .......................... I4. Achievement of Objective and Outputs ......................................................... 65. Major Factors Affecting Implementation and Outcome ......................................................... 9

6. Sustainability ........................................................ 107. Bank and Borrower Performance ........................................................ 10

8. Lessons Learned ........................................................ 119. Partner Comments ........................................................ 1310. Additional Information ........................................................ 13

ANNEX 1: Key Performance Indicators/LogFrame Matrix .................................................... 14ANNEX 2: Project Costs and Financing ..................................................... 15A2NNEX 3: Economic Costs and Financing ..................................................... 17

AINNEX4: BankInputs ..................................................... 19ANNEX 5: Ratings for Achievement of Objectives/Output of Components .............. ............ 20A:NNEX 6: Ratings of Bank and Borrower Performance ..................................................... 21ANNEX 7: List of Supporting Documents ..................................................... 22

MAP: IBRD No. 30907 ........................................................ 23

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Proiect ID: P034489 Project Name: MALAWI RAILWAYS RESTTeam Leader: Yash Pal Kedia TL Unit: AFTT1ICR Type: Core ICR Report Date: June 28, 2000

1. Project Data

Name: MALAWI RAILWAYS REST L/C/TF Number: 26960Country/Department: MALAWI Region: Africa Regional Office

Sector/subsector: TW - Railways

KEY DATESOriginal Revised/Actual

PCD: 03/26/93 Effective: 10/02/95Appraisal: 04/22/94 MTR: 06/30/96 09/07/96Approval: 03/28/95 Closing: 12/31/98 03/31/2000

Borrower/lImplementing Agency: Government of Malawi/Ministry of Transport and Public Works, Malawi RailwaysLimited (MRL), Malawi Railways (1994) Limited, and Malawi Lake ServicesLimited

Other Partners: USAID

STAFF Current At AppraisalVice President: Callisto E. Madavo E.V.K. JaycoxCountry Manager: Barbara Kafka Katherine MarshallSector Manager: Yusupha B. Crookes Jeffrey S. RackiTeam Leader at ICR: Yash Pal Kedia Yash Pal KediaICR Primary Author: Ajay Kwnar; Gualberto Lima

Campos

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, Hl,=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H-High, SU=Substantial, M--Modest, N-Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The primary objective of the Railways Restructuring Project (RRP) was to contribute to Malawi'seconomic growth through revitalizing the poorly-operated Nacala rail route, which is shorter and lessexpensive than other alternative routes currently followed. This would result in an increase in the Nacala

rail route's share of Malawi's overseas traffic and reduce landed cost of exports/imports thereby enhancingMalawi's competitive advantage. The basic strategy to achieve this objective comprised: (i) restructuring,commercialization, and eventual privatization of the Railways and the Lake Services, enabling them tooperate more efficiently; (ii) formulating and implementing a transport policy aimed at promoting genuineinter-modal and inter-route competition; and (iii) setting-up an institutional mechanism for closecoordination among the entities managing the Nacala rail route, viz., Malawi Railways, the railways on theMozambican side, and the Port of Nacala, to ensure sustainability of improved operations on the Nacalarail route. The project objectives were supportive of the efforts of the Govemment of Malawi to revitalizethe transport sector.

3.2 Revised Objective:

Although part of the credit was canceled in 1998, the project objectives were not revised duringimplementation.

3.3 Original Components:

The total cost of the project, inclusive of physical and price contingencies, was estimated at US$29.0million, with financing by: IDA= US$16.16 million (56%), USAID= US$11.98 million (41%) and GOM=US$0.86 million (3%).

The project comprised four components:

(a) Restructuring of Malawi Railways Limited (MRL), a company that was registered in UK prior toMalawi's independence and at the time of project formulation was responsible for managing therailways as well as the lake services. The proposed restructuring of MRL involved: (a)incorporation of two new companies, one for the railways and the other for the lake services; (b)formalization of relationships between the newly incorporated companies and the Governmentthrough performance contracts; (c) retrenchment of surplus staff; (d) disposal of surplus assets;and (e) eventual winding-up of MRL.

(b) Railway revitalization and privatization. The main objective of the component was to facilitatethe privatization of the railways through concessioning and enable it to increase the Nacala railroute's share of Malawi's overseas freight traffic. The component involved financing: (i) key itemsof rehabilitation of infrastructure and operating assets to enable MIRL to improve its operatingefficiency while awaiting privatization; (ii) consultancy and advisory services to assist indeveloping privatization options for the railways, preparing bidding documents, managing thebidding process, negotiations, and finalizing the privatization/concession agreement; and (iii)setting up of an institutional mechanism for effective coordination of the railways in Malawi andMozambique.

(c) Lake Services and Ports revitalization and privatization. The main objective of this componentwas to facilitate the privatization of Malawi lake services and ports and enabling them to increasetheir share of Malawi's freight and passenger traffic. The component involved financing: (i) keyitems of rehabilitation the operating assets of Malawi Lake Services Limited (MLS) in order toimprove its operating efficiency while awaiting privatization/concessioning; and (ii) consultancyand advisory services to assist in developing privatization options for the lake services and ports,preparing bidding documents, managing the bidding process, negotiations, and finalizing theprivatization/concession agreement.

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(d) Transport policy. The main objective of this component was to strengthen the institutional capacityof the Ministry of Transport for analyzing the performance of the transport sector, providingadequate response, and developing a transport policy aimed at improving the performance of thetransport sector.

Component costs were estimated as follows:

Proiect Cost Initial Estimates(US$ million)

Component Total Cost IDA Credit

Restructuring of MRL 8.27

Railway Revitalization and Privatization 18.25 15.40

Lake Service & Ports Revitalization and Privatization 1.23 0.76

Transport Policy 1.25

Total 29.001.1

3.4 Revised Components:

During implementation, the Development Credit Agreement (DCA) was amended to adjust the projectactivities to the changing environment and the RRP cost was revised to US$12.0 million. The changeswere made in response to the following:

(i) USAI]D decided to support the financing of staff retrenchment through a separate Program, under whichabout US$20.0 million was made available to GOM through various tranches on fulfillment of certainconditions, which included downsizing of the railways and retrenchment of staff and private concessioningof railways. As a result, USAID's contribution to the RRP was curtailed to US$2.2 million for financingof consultants and technical assistance, this being in addition to the Program assistance of US$20 million;and

(ii) as the project advanced and the Government prepared to concession the railways, it became clear fromthe concessioning experience elsewhere that investments by the parastatals were not always valued by thepotential bidders and there was a real danger that the value of many of the investments would have beendiscounted considerably by the propective bidders. In consultations with the Government, all initialinvestments were subjected to a rigorous examination and, even though included under the project, manysub-components were dropped or significantly reduced. Consequently, about US$9.0 million of the totalCredit was canceled in phases.

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Proiect Cost Revised Estimates(US$ million)

ComDonent Total Cost IDA Credit

Restructuring of MRL 2.00

Railway Revitalization and Privatization 9.30 9.00

Lake Service & Ports Revitalization and Privatization 0.50 0.50

Transport Policy 0.20

Total 12.00 9.50

The life of the project was initially set at three years. The closing date was extended once for one year andfurther for three months for the completion of an item pertaining to the supply of gang trolleys.

3.5 Quality at En"ry:

The following specific measures were built into the system to ensure that: (i) the project objectives wereachieved; and (ii) in case, for some reason, achievement of these objectives was delayed or put at risk, theproject could be discontinued at minimum cost.

Emphasizing cost reduction and organizational effectiveness. Restructuring Malawi Railways (MR) andretrenchment of surplus staff was a key condition of Credit effectiveness. This condition of effectivenessrequired GOM to: (a) operationalize the two newly incorporated companies, viz., Malawi Railways (1994)Limited (MR94) and Malawi Lake Services (MLS); (b) transfer staff and assets that were identified by thenew companies from MR to the new companies; (c) retrench staff not selected for transfer to the newcompanies; and (d) appoint an administrator for MR to commence disposal of surplus assets including realestate. In meeting this condition, out of MR's 3,600 staff, only about 1,200 staff were absorbed by thenew companies and the remaining staff were retrenched; and, in the case of the railways, less than 50% ofthe operating assets were transferred to the new company. In the event of delay in the privatization ofMalawi Railways and the Lake Services, the starting conditions (lean, trim and restructured new companiesunder new management) were expected to place the railways and the lake services in a better condition toincrease their share of freight and passenger traffic and reduce losses.

Maintainingfocus on privatization. The main objective of the project, viz., privatizing the railways, wasquite ambitious considering that: (a) internationally, not many railways had been privatized and very littleprivatization experience was available at the time of project formulation; (b) privatization would havetriggered further staff retrenchments and, consequently, more union opposition; and (c) there wasdeep-rooted suspicion of privatization within the government on fears and perceptions that it could lead toassets stripping, profiteering, and neglect of public service obligations by the successful bidders. Eventhough GOM had agreed in principle to the privatization of the railways, there was considerable risk thatpressure from trade unions, politicians, or other vested interests may lead to delay or the abandonment ofthe privatization agenda. To maintain the focus of the project and restrict the level of investments in caseGOM delayed or deviated from the goal of railway privatization, the project provided for making a majorpart of the project investment, about 70%, conditional on a satisfactory mid-term review.

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Promoting effective use of idle assets. The project provided for the sale of surplus assets that were nottaken over by the new companies. MR owned considerable real estate, which was lying idle. It wasreasoned that the sale of these assets, while not adversely affecting the railways' performance, would leadto two clear benefits: (a) the surplus land/buildings would be put to economic use elsewhere in theeconomy; and (b) the realization from the sale would enable the railways to liquidate their short andlong-tern liabilities. In actual practice, both the above expectations have been realized. After dischargingmost liabilities, MRL has a positive bank balance of about MK 20.0 million.

Effective management during transition. The project had stressed the need for the new companies to bemanaged by competent chief executives and, therefore, had insisted on the chief executives being selectedfrom the open market through a transparent process managed by a professional, independent body. Whilethis approach was followed, the response to the advertisements was poor and eventually the staff of MRIended up in the top management positions. This was a definite setback for the railways and since therailway privatization (concessioning) was around the corner, nothing was done to strengthen themanagement. This obviously did not prove to be a good idea as the concessioning was delayed and theperformance of the railways remained somewhat stagnant. This could be a significant lesson for the future.

Corridor approach. It was clear from the beginning that the performance of Malawi Railways, as far asinternational traffic was concerned, depended on efficient functioning of all the three entities comprising theNacala corridor, i.e., the Malawi side of the railway link, Mozambique side of the rail link, and the port ofNacala. The possibility of the two sides proceeding with the privatization of all the three systems at thesame time appeared remote. The project, therefore, made Credit effectiveness conditional on twocorridor-irelated actions: (a) MR94 and Mozambique Port and Railway Company (Portos e Caminhos deFerro de Mocambique, E.P - CFM) signing a wide-ranging Operations Agreement to enable extended runof trains in each other's system; and (b) MR94 and CFM setting up a Joint Review Board to sort outoperational problems. Even though MR94 and CFM did not make effective use of the Agreement, theexistence of the Operations Agreement nevertheless enabled the concessionaire that took over the railwaysin December 1999 to start operating trains across the border soon after taking over. The Joint reviewBoard met regularly and its meetings contributed to resolving operational problems as they arose.

Financial supportfrom GOM. It was anticipated that it would take some time for MR94 to increase thelevel of iraffic and be financially self-sustaining. The project, therefore, required GOM to compensateMR94 for the losses on the passenger services, which MR94 was required to provide as public serviceobligations. This was meant to prevent MR94 from cutting back on maintenance. In practice, the financialsupport was provided but with irregular frequency and that did adversely affect the railway's performnance;

Restructuring of Malawi Railways Limited (MRL). The restructuring of MRL in advance of the proposedconcessioning of railways was meant to improve the railways' operational and financial performance andmake surplus land and real estate available to other sectors of the economy during the time it would havetaken for the concessioning process to be completed, estimated between two and three years. Theincorporation of new companies was expected to: (i) allow the two key functions - operations anddownsizing - to be managed by separate entities with appropriate expertise and mandate, operations by thenewly incorporated companies and the retrenchment of surplus staff and disposal of surplus assets by theold company MIRL; (ii) allow new companies to start with the right set of conditions for improvingperformance - no surplus staff, staff selected on the basis of competence and merit, no surplus assets, nooutstanding debt or debt service obligations, and a performance contract with the Government committed tofinance the deficit of public service obligations; and (iii) make new companies accountable for their

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performance, having been left with no frequently-expressed excuses for failure, viz., debt burden, surplusstaff and government interference. The improved performance as a result of restructuring was not onlyexpected to benefit the economy, but also make the railways more attractive for the potentialconcessionaires.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement ofobjective:

The main objective of the project has been Satisfactorily achieved. Revitalization of the Nacala-rail routeis close to being achieved as a result of the privatization (concessioning) of the railways. This was the keycomponent of the project (with almost 90% weight) and has been successfully completed. Theconcessionaires took over the railways and commenced operations on December 1, 1999, one month beforethe close of the project. Also, a Memorandum of Understanding (MOU) has been signed by theGovernment of Mozambique with the same concessionaires (independently selected) for the concession ofthe Mozambican side of the Nacala railway system as well as the port of Nacala. The concessionairespropose to commence operations on the Mozambican side of the Nacala Corridor by the end of June 2000.

The status of other outcomes related to the main Project objective is as follows:

(a) Privatization of the Malawi Lake Services. The privatization of Malawi Lake Services wasdelayed. For a long time, GOM could not take a decision to go ahead with the privatization ofthese services, first, because it felt that the response would be poor and, second, because ofconsiderable disagreements on whether to offer the services in one integrated lot or in appropriatelyunbundled packages. Despite this, the process is now proceeding ahead and is likely to beconcluded before the end of 2000.

(b) Restructuring of MRL. Considerable progress has been made in selling surplus land, real estateand assets belonging to MiRL. The formnal winding up of MRL is only awaiting the formal transferof unsold assets such as scrap and discarded locomotives and wagons to MR94 or another body tobe specified by GOM and the settlement of a few cases of real estate sales now pending in courts.

(c) Transport policy. The institutional study (financed by USAID) was completed in June 1999 afterconsidemble delay. The consultants made recommendations with regard to the legal and regulatoryframeworks for railways, inland waters, shipping, road traffic, transport, and civil aviation; theorganizational restructuring of the Railway, Marine, Civil Aviation and Road Traffic Departrnentswithin the Ministry of Transport and Public Works; the computer systems; and the transport database. These recommendations were accepted and are currently under implementation, the one mostrelevant pertaining to the appointment of a regulator having already been implemented. Theregulator would be responsible for enforcing the safety and environment-related requirements thathave been stipulated in the concession agreement.

(d) Operational performance. Achievement of performance targets prior to concessioning has been farbelow expectations. The overseas traffic increased from 100,000 tons at the start of the project toonly 145,000 tons for the financial year 1998-99 as against the revised target of 300,000 tons. Therest of the overseas traffic (estimated between 650,000 and 750,000 tons) continued to movethrough the port of Durban (about 400,000 tons) and the ports of Beira and Dar Es Salaam (about150,000 tons). The target for the domestic traffic, however, was achieved with the traffic increasingfrom 176,000 tons at the beginning of the project to 210,000 tons by the end of the financial year

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1999. A number of factors have contributed to the below-expectation performance: (a) poorperformance of the railway system on the Mozambican side and also of the port of Nacala; (b)GOM not keeping its side of the Performance Contract and providing the agreed financial supportfor the passenger services operated by MR94 as a public service obligation, thus contributing toinsufficient allocation of funds for maintenance; and (c) poor staff morale resulting from theuncertainty caused by the impending privatization and further staff retrenchment. The performanceshould also be viewed in the changed context of reforms implementation. With an increase incommitment from the Government to privatize the railways and the lake services, substantialinvestments aimed at rehabilitation of infrastructure were dropped or significantly reduced due toreasons explained in section 3.4. This also adversely affected the perfornance of the railways tosome extent. However, the operational and financial performance of MR94 for the year endingMarch 31, 1999 has showed some improvement with the operations resulting in a net surplus for thefirst time. With the railways having been successfully concessioned, performance is expected toimprove substantially in the coming years. During the first five months of operations under theconcession, the international freight traffic has already shown an increase of about 30% comparedto the same period one year ago.

On the strength of successful privatization of the railways, the rating should have been Highly Satisfactory.However, poor performance of the railways during the last three years and the non-completion of the lakeservices privatization have dragged down the rating to Satisfactory.

4.2 Outputs by components:

Restructuring component. This component was successfully completed even before the project becameeffective as successful completion of the restructuring process was a condition of effectiveness. The taskscompleted under the component included: (i) incorporation and operationalization of two new companies,one for the railways called MR94 and the other for the lake services called MLS; (ii) transfer of assets andstaff to the new companies from MR; (iii) retrenchment of staff not required by MR94 and MLS; (iv) saleof most of the real estate and railway houses; and (v) sale of some operating assets. The only taskremaining to be completed is the transfer of assets not sold to MR94 and the formal winding-up of the oldMR.

Revitalization and privatization of railways. There were two sub-components: (i) revitalization of therailways while waiting to be privatized/concessioned; and (ii) its concessioning. The first sub-componenthas been only partially completed. The increase in traffic has been modest compared to the targets (seeSection 4.1). The second and by far the most important sub-component has been fully completed as therailways have been successfully concessioned and the concessionaire has commenced operations.

Lake Services revitalization and privatization. There were two sub-components: (i) revitalization of thelake services while waiting to be concessioned/privatized; and (ii) concessioning/privatization of the lakeservices and ports. The traffic increase has been very modest compared to the targets. The preliminarybidding documents for the concessioning of the Malawi Lake Services have already been issued. Thewhole process is expected to be completed by the end of 2000.

Transport policy component. The institutional study for the Ministry of Transport has been completed.The recommendations were discussed by the consultants with the Ministry officials and accepted, somewith some modifications. The recommendation with regard to the regulatory body has been implementedand a regulator has been named. Most other recommendations have still to be implemented and an ActionPlan has been prepared for the implementation of the other remaining recommendations by the end of the

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year 2000. In the meantime, the Ministry of Transport is refining the transport policy, which was earliersent to the Cabinet for approval but could not be presented to the Cabinet. The transport policy isproposed to be refined to reflect the different roles and functions of the Government: policy making,regulation, conceding authority, and owner of infrastructure.

4.3 Net Present Value/Economic rate of return:

The benefits to the economy were expected to accrue from diversion of Malawi's exports/import trafficfrom the longer and more expensive route to the port of Durban, South Africa to the shorter and lessexpensive rail route to the port of Nacala. When compared against the estimated project costs, the ERRwas computed as 91%. However, during the four years of implementation, the actual increase in Malawi'sinternational traffic through the port of Nacala remained much lower than that projected under the project.This would have resulted in a significant drop in the estimated ERR but for two facts: (a) less than half ofthe estimated project cost was actually incurred mainly due to restrictions that were imposed by thePrivatization Commission on large investments in enterprises for which the privatization process hadbegun; and (b) the traffic on the Nacala route is expected to grow at a fairly rapid rate from now onwardsas a result of the takeover by the concessionaires. However, in the light of the actual experience so far, theprojections of the freight traffic from now onwards until the year 2005 have been revised downwards to amaximum of 350,000 tons as compared to 525,000 tons projected in the Staff Appraisal Report (SAR).The actual benefits have also been decreased by 25% to account for the discounts being offered by thefreight forwarders for export traffic to Durban. As such, despite poor traffic growth and reduced trafficprojections for the coming years, the revised estimated ERR remains not far from the one computed at thetime of project appraisal, i.e., 78%. The major benefits under this Project are expected to come fromimprovement of performance as a result of the privatization (concessioning) and not from investmentswhich explains the high rate of return.There are other benefits that have accrued under the project but have not been taken into consideration forcomputimng the ERR such as: (a) economic benefits from improved operating efficiency for the domestictraffic; (b) redeployment of retrenched staff in productive employment in other sectors of the economy; and(c) productive utilization of surplus land, houses, and other assets of MR94 in other productive sectors ofthe economy.

4.4 Financial rate of return.

Operating ratio (revenue/expenditure including depreciation) targets were specified under the SAR. Thesetargets could not be met due to poor growth of freight traffic compared to the one projected. Compared tothe target of about 90% by the end of the years 1998-99, the actual operating ratio was 110%. Therevenues and operating expenditures for the 1996-1999 period are indicated in the table below. Thenon-achievement of the targted operating ratio was mainly due to the projected traffic not having beenmaterialized. However, with the private concessioning of Malawi railways, the soon-expectedconcessioning of the Nacala port and the railway system on the Mozambique side, and the expectedquantum jump in operating efficiency, overseas traffic is expected to increase quickly and substantially.This traffic, as indicated elsewhere, is currently moving through the port of Durban. With the increase intraffic, the targets for the operating ratio are also expected to be achieved by the year 2002.

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Railwavs financial Performance

1996 1997 1998 1999Traffic 000 tons 296 284 310 355

Turnover 000 mk 58,858 73,121 85,071 158,740Other Income 000 mk 12,891 15,800 18,690 34,651Total Income 000 mk 71,749 88,921 103,761 193,391

Staff costs 000 mk 22,480 29,849 39,908 57,668Operating costs 000 mk 37,043 47,722 71,507 125,209Consumables 000 mk 853 1,416 1,159 2,106depreciation 000 mk 22,828 29,335 28,356 28,213Total expenditure 000 mk 83,204 108,322 140,930 213,196

Operating ratio % 116 122 136 110

4.5 Institutional development impact:

The project had a significant impact in terms of institutional development. In the first phase ofrestrLcturing, two new companies were set up, one for the railways and the other for the lake services. Thenew companies were able to start operations with the right set of conditions for improving performance,i.e., rio surplus staff, staff selected on the basis of competence, no surplus assets, no outstanding debt ordebt service obligations and a performance contract with the Government committed to finance the deficitof puLblic service obligations (PSOs). The railway was also concessioned in December 1999. Theinstitutional study on the Ministry of Transport has been completed and the recommendations are currentlyunder implementation, and the one most relevant recommendation pertaining to the appointment of aregullator has been already implemented. The other recommendations pertain to the strengthening theanalytical capacity of the Ministry of Transport and establishing regulatory bodies for the other modes oftransport, and establishing the right legal framework for enhancing competitiveness and efficiency of thedifferent modes of transport. Most surplus staff has been retrenched and surplus land and assets have beendisposed of.

5. Mlajor Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Improvements on the Nacala rail route were dependent not only upon increasing the efficiency of MRL, butto a greater extent on improving efficiency of railways on the Mozambican side as well as the port ofNacala, which were beyond the control of GOM. Part of the delay in issuing of the bidding documents forselecting consultants to advise the Govermnent on privatizing MR94 was caused by GOM trying to makethe Government of Mozambique agree to use the same terms of reference (TORs) and the same consultantfor the Mozambican side of the Nacala rail route as well as to get the whole corridor concessioned to thesame private operator at the same time through a common bidding process. As this agreement could not bereached, GOM went ahead with the concessioning process by itself while a parallel process was on-going inMozambique.

Operational performance during some of the years (1995/96) was adversely impacted by heavy rains whichresulted in washaways/derailments and consequent closure of the Nacala rail line to traffic.

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Operational performance was also negatively affected by perceived inefficiency of the Nacala route by thecustomers resulting in continued routing of overseas imports/exports through the port of Durban.Performance during 1996/97 was affected by the offer of significantly reduced sea fares by a shippingcompany for containers loaded at Durban, thus providing incentives for use of the port of Durban. Thoughthese reductions were unwarranted and, obviously, unsustainable in the face of competition, thesenevertheless did adversely affect the traffic to Nacala for a short period of time. Also, due to imbalance inMalawi's external trade (imports being twice that of exports), the trucks bringing imported goods fromSouth Africa are able to offer heavy discounts for the export traffic to Durban, thus making the Durbanroute comparatively cheaper for the country's exports. However, once the Nacala rail route i perceived asefficient and Malawi's imports are routed through the port of Nacala, this situation will automaticallydisappear. In addition, heavy investment in road transport vehicles were made by Malawi's business sectorin response to uncertainty of the Nacala route during the past many years. These businessmen are alsocompeting aggressively with the railways for recovering their capital investments to the extent possible and,in the short run, offering lower tariffs along the road route to the port of Beira on the basis of marginalcosts.

5.2 Factors generally subject to government control:

Inability of the Government to provide for effective management during interim restructuring period,compromised perfornance of the railways during the initial years.

Delays in payment of compensation for passenger services by the Government, as agreed in the DCA,impacted adequate maintenance of rail infrastructure.

The Project Implementation Committee (PIC). PIC was established by GOM to monitor the projectimplementation. Headed by the Permanent Secretary of the Minister of Finance, its members included thechief executives of the implementing agencies, the permanent secretaries of the concemed Ministries andother interested parties. PIC was quite effective in the first year of the project. As a result, the first phaseof restructuring of the old Malawi Railways (MRL), also a condition of effectiveness, was successfullycarried out. However, PIC, though comprising of high government officials, failed to establish anappropriate mechanism for effectively following through its own decisions. This adversely affected itseffectiveness. In particular, PIC could not enforce the following decisions, which had a considerableimpact on the project outcome: (a) regular and timely payments of the subvention on account of thepassenger services, which was then cited as a reason for poor perforrnance by MR94; (b) timelyfinalization of a strategy for the privatization of the Malawi Lake Services; and (c) making MR94accountable for the achievement of the performance targets agreed by MR94 in the performance contractsigned by MR94 with GOM. The railway privatization component, the key project objective, wasmonitored by the Privatization Commission, and, therefore, the inadequate effectiveness of PIC did notaffect the long term objective.

5.3 Factors generally subject to implementing agency control:

Delayed implementation of actions agreed during supervision missions by MR94 adversely affected: (i)availability of wagons; (ii) turnaround time for wagons; and (iii) perception of the reliability of the Nacalaroute by some customers.

5.4 Costs andfinancing:

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As some of the investment components under the project were subsequently dropped during

implementation, there was never a case of inadequate financing of the project components. Disbursements

of funds seriously lagged behind the original estimates partly because GOM failed to provide the 5%

counterpart funds on the grounds that the Government does not have this responsibility for companiesincorporated under the Company Act such as MR94. However, MR94 maintained that it was also unable

to provide the counterpart funds due to GOM having failed to keep its side of the performance contract and

provide agreed financial support for the passenger services operated by MNR94. Subsequently, the DCAhad to be modified to enable 100% payments from the Credit for foreign purchases and 90% payment for

local purchases.

As shown in Annex 2, the final Project cost was US$9.3 million, which represented 32% and 78% of the

initial and revised estimates respectively. The decrease in the Project cost compared to the revised cost was

due to less expenditure by USAID and also due cancellation of a high cosr track rehabilitation component.This rehabilitation would now be taken up by the concessionaire.

The final Project cost of US$9.3 million was eventually finaced as under: IDA US$6.7 million (72%),USAID - US$2.2 million (33%) and GOM - US$0.4 million (5%). The IDA Credit disbursementsamounted to 70% of the revised Credit amount of US$9.5 million.

6. Sustainability

6.1 Rationale for sustainability rating.

Sustainability is likely. Key component of the project related to concessioning of the railways has been

successfully completed. The concessionaire took over the railways and commenced operations onDecember 1, 1999. The new railway company, MR94, is starting with the right set of conditions forimproving performance: no surplus staff, staff selected on the basis of merit, no surplus assets, nooutstanding debt and a performance contract with the Government committed to finance the deficit ofPSOs. The privatization of Malawi Lake Services has been delayed but the process is proceeding ahead

and is likely to be concluded before the end of calender year 2000. The old MR was able to dispose ofalmost all surplus real estate and is now awaiting formal closure. The study for institutional strengtheningof the Ministry of Transport was completed in June 1999 and is now under implementation.

6.2 'rransition arrangement to regular operations:

With the signing of the MOU for concessioning Mozambican side of railways and the concessionaires (thesame concessionaire as for Malawi Railways) set to take over the railways the port of Nacala by the end of

June 2000, the stage is set for efficiency improvements along the Nacala corridor. A one-man regulatorybody has also been established but technical assistance in the initial few months is necessary. USAID hasagreed to provide this technical assistance. As part of the Privatization and Utility Reform Project,currently under preparation (expected to go to Board in the fourth quarter of FY00), the experience withprivatization would continue to be documented and monitored.

7. Bank and Borrower Performance

Bank7. 1 Lending:

The Bank's performance during identification, preparation and appraisal was Satisfactory. The project

was well designed and all aspects were given due attention as explained in Section 3.5.

- 1 1 -

7.2 Supervision:

The Bank's performance during supervision was Satisfactory. Regular supervision missions took place anddetailed discussions were held with the Government, implementing agencies and other stakeholders. Eventhough there were some reservations on the realization of the MRL privatization objective at the time ofproject preparation, open discussions with the borrower helped assuage many concerns and paved the wayfor railways privatization. The Bank showed flexibility in amending the DCA during supervision toaccommodate the changing context and respond to realities on the ground.

7.3 Overall Bank performance:

The overall Bank performance was Satisfactory.

Borrower7.4 Preparation.

The Borrower's performance during preparation was Satisfactory. The Borrower fully participated in allaspects of project design.

7.5 Government implementation performance.

Although PIC could have been more effective, the Borrower's performance during implementation wasSatisfactory. A high level delegation from Malawi went to Mozambique to facilitate concessioning of theentire Nacala corridor, though not with much success. The government did steadfastly continue to supportthe privatization of the railways. The concessioning process was particularly well managed by thePrivatization Commission in terms of the bidding process, bidders' conference, evaluation of the bids,decision to re-invite the bids and final negotiations.

7.6 Implementing Agency:

The performance of MR94 was Satisfactory. Even though the company failed to achieve the keyperformance targets, they did face adverse factors such as the continuing poor performance of the Nacalaroute on the Mozambique side, heavy rains in one year as a result of which considerable length of trackwas damaged, non-payment/delayed payment of agreed subvention for passenger services by theGovernment, and poor morale of staff due to the uncertainty facing their future.

7.7 Overall Borrower performance:

The overall Borrower's performance was Satisfactory.

8. Lessons Learned

1. Since the concessioning process usually takes between two to three years to complete, restructuring therailways (without long-term investments) to start with can produce considerable benefits for theeconomy in the interim, as has happened in the case of Malawi Railways. Malawi Railways wasrestructured in 1995 and the concessionaires took over the operations in 1999. The benefits thataccrued to the economy during the four years, i.e., after restructuring and before the takeover of therailways by the concessionaires, comprised: (a) reduction in operating cost of the railways, thus

- 12 -

obviating the need for any financial support from the government; (b) improved accountability of the

newly incorporated railway and lake service companies; (c) sale of surplus land and houses, which

were then put to productive use; and (d) generation of funds from the sale of surplus assets enough to

pay off all the outstanding accounts payable and other external debts. Additionally, a downsized

railway without any outstanding debts also enhanced the attractiveness of the railways for the potential

concessionaires. Restructuring the railways while waiting for the completion of the concessioning

process can lead to reduced losses in the interim. However, the usefulness of long term investments

prior to concessioning appears doubtful as the potential concessionaires are unlikely to fully factor in

these investments in estimating the value of concessions.

2. Even though the interim restructuring of railways yielded considerable benefits as indicated in

paragraph (i) above, the operational performance did not show much improvement and the targets of

international traffic were not achieved. It became apparent during project implementation that, in spite

of restructuring, the fact that the railways continued to operate within a parastatal framework made the

improvements in performance difficult to achieve. A parastatal framework, associated as it is with

inadequate staff motivation, commitment, and accountability, is not appropriate for the railways,especially in an intensely competitive business environment. Private sector participation in the

operation and management of railways (henceforth referred to as privatization) appears essential for

improving their performance and making them operate as financially self-sustaining entities.

3. Whether managed as it is or through private participation, the railways are unlikely to become

financially viable unless surplus staff is retired/retrenched. Even though retrenchment of staff is a

politically and socially sensitive issue and difficult to implement, the issue has to be addressed.Effective retrenchemnt of surplus staff (about 70% of the original staff strength) during the first phase

of restructuring did result in a very substantial decline in the railway losses and also made the railway

much more attractive for the prospective concessionaires.

4. Even though the railway was restructured with the expectation that the Nacala corridor's share of the

international traffic will start increasing even as the concessioning process was underway, theexpectation did not materialize and the international traffic increased only marginally. One of the main

reasons for this inadequate performance was the inability of the government to get the rightmanagement personnel to manage the railways in the interim. An effort was made to extend theselection process to experts outside the railways but the response was quite poor. Since a decision to

concession the railway had already been taken and the mandate of the management of the new railway

company pertained to a very short period of time, spending time and money on building internalmanagement capacity was clearly not justified, nor was there any willingness on the part of themanagement to take part in a such an effort. Under such circumstances, the best decision would have

been to engage short-term outside experts. It is important to ensure effective management of therailways during the concessioning process, even if it means engaging expatriates.

5. The concessioning experience elsewhere suggests that investments by the parastatals are not alwaysvalued by the potential bidders and there is a real danger that many of the investments could beconsiderably devalued. All investments prior to concessioning, therefore, need to be subjected to arigorous technical and financial evaluation. To the extent possible, all long-lived investments prior to

concessioning should be avoided.

6. The Government of Malawi was initially keen to collaborate with the Government of Mozamnbique and

issue one bidding document for the concession of the whole Nacala port railway system in order to

facilitate selection of one concessionaire for the whole system. However, due to difference in the

- 13 -

approach of the two govemments with regard to the concessioning process and selection of theconcessionaires, agreement to issue one bidding document could not be achieved. At that stage, theGovernment of Malawi decided to go ahead with the concession for Malawi Railways independent ofthe actions of the Government of Mozambique, in spite of the risk of the independent Malawi Railwayconcession proving less attractive to bidders. In actual practice, the propective concessionaires wereable to manage the process on both sides of the corridor and eventually the concessionaire identified forboth sides of the corridor has turned out to be the same. An imnportant lesson of this process is that,while concession of a corridor, wherever applicable, is desirable, it may not be a good idea to delay theprivatization process on this account. The role of the potential concessionaires in bringing about aworking ararngement for the corridor as a whole should not be underestimated.

9. Partner Comments

(a) Borrower/implementing agency.MALAWI RAILWAYS RESTRUCTURING PROJECT

Reference is made to the ICR made available to me on Wednesday 21s- June 2000 for my comments.

I wish to congratulate the Bank for this comprehensive ICR which provides an accurate account of theproject in as far as this Ministry is concemed.

The above said, I have the following minor comments to make:-

(a) Transport Policy Component para 4.2.

The National Transport Policy has been finalised and approved by the Cabinet Committee onTransport. Our understanding is that the policy document is acceptable to the Bank as indicated duringthe last World Bank Mission. We agree that the policy is not a static document in that it is subject tofurther review.

(b) Project Implementation committee para 5.2

As you are aware, in Malawi Heads of Ministries are Principal Secretaries and the PIC Chairman wasthe Secretary to the Treasury of the Ministry of Finance.

(c) Sustainability para 6.1

The new Railway Company is the Central and East African Railways (CEAR).

Regarding the PSO obligations, I would like to state that a recent study by the Privatisation Commissionindicated that the passenger services are profitable operations both on Malawi Railways and LakeServices. It would appear then that Govemment will be paying CEAR for profitable operations. How Iwished this was done before the concession agreement was signed. It is my hope that this will betaken into account in the MLS exercise.

(d) Lessons learned para 8(vi).

On the Mozambique side the idea was the concessioning of the whole railway system including the port.

I hope you find the foregoing useful.

- 14 -

Yours faithfully

T.M. Kaunda

Director of Transport Planning

For: SECRETARY FOR TRANSPORT AND PUBLIC WORKS

(b) Coflnanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

Since the commencement of the concession on December 1, 1999, both the working environment and therailways' performance have shown a significant visible improvement. The staff appear motivated andenthusiastic. Compared to similar period one year ago, the freight traffic during the first four months(December 1999 to March 2000), both international and local, is up by 50%, and the passenger traffic byabout 35%. The parcel, baggage and mail traffic has increased twenty-fold. Overall revenues are up byabout 50%. The revenues from passenger traffic is up due probably to improved punctuality andcleanliness and better control on ticketless travel. Locomotive and rolling stock availability, chronicconstraints in the past, improved to 85% and 90% respectively. To improve fuel traffic, tank wagons arebeing calibrated to ensure that the losses in transit can be accurately measured and contained within theallowable percentage. Calibration of about 30% tank wagons has already been completed. Theconcessionaire has also broken new ground and commenced operating trains across the border using itsown locomotives all the way from Blantyre to Nacala and the other way round. This is already beginningto have an impact on transit times and, obviously, has a great potential. Enhancing staff motivation andaccountability, improving interactions and communications with staff, daily monitoring of the previousday's performance, effective use of the UNCTAD wagon tracking system and other management andoperations software, improving the quality of maintenance, and building customer confidence appear to bethe top priorities of the concessionaire.

- 15 -

Annex 1. Key Performance Indicators/Log Frame Matrix

Kev Indicators of SuccessItem Unit For financial year endinL March

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005International Traffic 000 tons Target 175 240 300 300 300 400 525 525 525 525

Actual/Revised target 120 137 143 145 170 200 200 250 300 350Domestic Traffic 000tons Target 210 210 210 210 210 210 210 210 210 210

Actual/Revised target 176 147 167 210 210 210 210 210 210 210Total traffic 000 tons Target 385 450 510 510 510 610 735 735 735 735

Actual/Revised target 296 284 310 355 380 410 410 460 510 560Operating ratio % Target 110 98 89 94

Actual 116 122 136 110Handing over of MR94 Date Target Sep-97to concessionaire Revised Target Mar-99

Actual Dec-99Handing over of Lake Date Target Sep-97Services to concessionaire Revised Target Mar-99

I _ Actual Sep-00

Note 1: The targets of international traffic have been adjusted to account for delay in the concessioning process and the targetof 300,000 tons has been maintained until the takeover by the concessionaire.Note 2: Since the traffic build up has been slow, the traffic projections beyond the year 2000 have also been reduced.

-16 -

Annex 2. Project Costs and Financing

Comparative Project Costs: Appraisal Estimate, Revised Estimate and Actual(US$ million)

ACTUALAppraisal Revised Other Percent. of Percent. of

Project Comrwonent Estimate Estimate IDA_ Donors GOM Total Appiraisal Revised

Restructuring of MIRL 8.3 2.0 2.0 0.1 2.1 25% 105%

Railway Revitalization and Privatization 18.3 9.3 6.2 0.2 6.4 35% 69%

Lake Service & Ports Revit. and Privat. 1.2 0.5 0.5 0.5 41% 100%

Transport Policy 1.3 0.2 0.2 0.1 0.3 24% 150%

-Total 29.0 I 12.0 6.7 2.2 0.4 9.3 I 32% 78

- 17 -

Project Costs bv Procurement Arran2ements (Actual/Latest Estimate)(in US$ million equivalent)

Procurement Method /1Expenditure Categorv ICB NCB Other/2 N.B.F. Total Cost

1. Works 1.0 1.0(1.0) (1.0)

2. Equipment and Spare Parts 4.1 0.2 0.6 0.3 5.2(4.1) (0.2) (0.6) (4.9)

3. Consultant Services 0.7 2.3 3.0(0.7) (0.7)

4. Training 0.1 0.1(0.1) (0.1)

Total 5.8 0.2 0.7 2.6 9.3(5.8) (0.2) (0.7) 0.0 (6.7)

/I Figures in parenthesis are the amounts financed by the IDA Credit.

/2 Includes civil works and goods procured through national shopping, consulting services,

services of contract staff of the project management office, training, technical assistance services,

and incremental operating costs related to (i) managing the project, and (i) re-lending project funds

to local government units.

- 18 -

Annex 3: Economic Costs and Benefits

Without Proiect CaseInvestments Total I Traffic I Traffic Traffic

without Traffic Nacala I Beira D rban TransportYear Proiect (000 onnes) Cost

1996 1.00 650 100 100 450 851997 1.00 675 100 125 450 881998 1.00 700 100 150 450 901999 1.00 750 100 150 500 982000 1.00 750 100 150 500 982001 1.00 750 100 150 500 982002 1.00 750 100 150 500 982003 1.00 750 100 150 500 982004 1.00 750 100 150 500 982005 1.00 750 100 150 500 98

=___ __________ Proaect Case (AoDraisal)Be efits

Investments Total Traffic Traffic Traffic Savings in Netwith Traffic Nacala Beira Durban Transport Transport Cash

Year Proiect (000 Tonnes) Cost Cost Flow1996 15.94 650 175 100 375 80 4.7 -10.21997 10.09 675 240 125 310 79 8.8 -0.31998 3.04 700 300 150 250 78 12.6 10.61999 1.00 725 400 150 175 75 22.6 22.62000 1.00 750 525 150 75 71 26.8 26.82001 1.00 750 525 150 75 71 26.8 26.82002 1.00 750 525 150 75 71 26.8 26.82003 1.00 750 525 150 75 71 26.8 26.82004 1.00 750 525 150 75 71 26.8 26.82005 1.00 750 525 150 75 71 26.8 26.8

| ERR 91%

Traffic Route Costs: Tarif/Tonne (US$STonne)Nacala Beira Durban

Road 0 68 60Rail 52 73Port 18 18 15Cabotage 15 15

85 101 148

- 19 -

IMWith Proiect Case (Ad usted)Total Benefits

Investments International Traffic Traffic Traffic Savings in Netwith Traffic Nacala Beira Durban Transport Transport Cash

Year Proiect (000 To ines) Cost Cost Flow1996 2.89 650 120 100 430 84 0.9 -0.91997 2.35 675 137 125 413 85 1.7 0.41998 6.42 700 143 150 407 88 2.0 -3.41999 1.12 725 145 150 430 91 4.9 4.82000 0.40 750 165 150 435 94 3.1 3.72001 2.00 750 200 150 400 91 4.7 3.72002 2.00 750 200 150 400 91 4.7 3.72003 2.00 750 250 150 350 88 7.1 6.12004 2.00 750 300 150 300 85 9.5 8.52005 2.00 750 350 150 250 82 11.8 10.8

| ERR 78%

- 20 -

Annex 4. Bank Inputs

(a) Missions:Stage of ProjectdCycle No. of Persons and Specialty Performance Rating

(e. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationDec-93 4 SRE,TE, RR, DRR

Appraisal/NegotiationApr-94 10 SRE, PE, SPS, TS (2),

TEC,TE, FA,PO,RS

Supervision.Apr-95 4 PSDS,TEC,P0,SRE HS HS

Oct-95 2 SRE,FA S S

Feb-96 3 SRE.FA,EC S S

Jul-96 2 SRE,EC S S.Apr-97 4 SRE, PE,EC,IPO S S

Jan-98 I SRE S S

Jul-98 2 SRE,PTS S S

Mar-99 2 SRE, FMS S S

ICRSep-99 3 SRE, IPO, EC S S

SRE: Senior Railway Engineer; TE: Transport Engineer; RR: Resident Representative; DRR: Deputy Resident

Representative; PE: Port Engineer; SPS: Senior Procurement Specialist; TS: Transport Specialist; TEC: Transport

Economist; PO: Project Officer; FA: Financial Analyst; RA: Railway Specialist;PSDS: Private Sector Development

Specialist; EC: Economist; PE: Principal Economist; IPO: Infrastructure Program Officer; PTS: Principal Transport

Specialist; PO: Project Officer; FMS: Financial Management Specialist.

(b) Staff:

F- Stage of Project Cycle Actual/atest EstimateNo. Staff weeks US$ (p0)

Identification/Preparation 10.7 25.0Appraisal/Negotiation 39.9 99.7Supervision 80.9 224.8ICR 9.5 11.4Total 141.0 360.9

-21-

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingZMacropolicies O H OSUOM O N * NA

Sector Policies O H *SUOM O N O NAZ Physical O H *SUOM O N O NA2 Financial O H OSUOM O N O NAE Institutional Development 0 H O SU O M 0 N 0 NA

Environmental O H OSUOM O N O NA

SocialM Poverty Reduction O H OSUOM O N * NAZGender OH OSUOM ON *NAZ Other (Please specify) O H OSUOM O N * NA

• Private sector development 0 H O SU O M 0 N 0 NAX Public sector management 0 H O SUO M 0 N 0 NAM Other (Please specify) * H OSUOM O N O NAOther= Privatization of railways

-22 -

Annex 6. Ratings of Bank and Borrower Performance

(HS-Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

0 Lending OHS OS OU OHUEl Supervision OHS OS OU OHUE Overall OHS OS O U O HU

6.2 Borrower performance Rating

E Preparation OHS OS OU O HUO Government implementation performance O HS O S O U 0 HUE Implementation agency performance OHS OS OU O HU

O Overall OHS OS OU O HU

- 23 -

Annex 7. List of Supporting Documents

1. Malawi Railways Restructuring Project, Staff Appraisal Report, March 3, 1995, The WorldBank.

2. Memorandum and Recommendation of the President of the International BankforReconstruction and Development to the Executive Directors on an Proposed Loan ofUS$38.6 Million Equivalent to Malawi for a Railways Restructuring Project, March 3, 1995,The World Bank.

3. Credit Number 2696-MAAI, Credit Agreement between Malawi and the International BankforReconstruction and Development, August 14, 1995, The World Bank.

4. Malawi Railways Restructuring Project, Amendment to the Development Credit Agreement,April 7, 1997, The World Bank.

5. Malawi Railways Restructuring Project, Supervision Reports including ImplementationSummaries (Forms 590) or Project Status Reports (PSR) from June 23, 1995 to December20, 1999, The World Bank.

6. Zambia Railways Restructuring Project, Project Concept Document, March 31, 2000, TheWorld Bank.

- 24 -

MAP SECTION

IBRD 3090:7

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MAY 2000